Kahani Ghar Ghar Ki: Should India Be Worried About Its Household Debt?

As reports surface of a doubling of the Indian household debt, it’s a good time to pause and assess the situation. Is this merely a blip in our spending activities, or are we veering toward a westernised consumer culture as feared by so many of our right-wing leaders?

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s much as governments and banking systems may try and influence what we do in our day-to-day lives, cultural stereotypes – especially when it comes to money – are hard to sway. Americans, for example, pride themselves on a consumer culture, thereby accumulating credit cards (and the debt that comes with them) faster than you can say “fiscal irresponsibility”. In contrast, Japan has an extreme saving culture, which has in turn led to historically sluggish growth even as its government begs them to go out and spend a little.

Any Indian child who has asked his parents to buy him something not related to education will testify that Indians are not exactly the biggest spendthrifts. True, we do like extravagant weddings, and have a strange tendency to hoard gold like desi leprechauns, but by and large, we’re happiest when our money is sitting pretty in our savings account accumulating a Hindu rate of compound interest. We have also been traditionally debt-saverse. We don’t love the idea of owing people money. I once heard of a gentleman who always maintains a positive credit card balance – a concept that has started appealing to me more and more as time goes by.

Therefore, when reports surfaced recently of a doubling of the Indian household debt, it was a good time to pause and assess the situation. Is this merely a blip in our spending activities, or are we veering toward a westernised consumer culture as feared by so many of our right-wing leaders? Are we simply loosening our belts a little for some much-needed retail therapy, or do warnings long portended as to the horrors brought forth by mini-skirts and McDonald’s need to be finally heeded?

First, while it is true that we seem to be spending more, India is still rather low on the spectrum of save versus splurge. India’s household debt as a percentage of GDP is a paltry 11 per cent. In comparison, China is over 50 per cent and the US stands proudly at somewhere nearing 80 per cent. So, there is good reason to suspect that the increase is nothing too ominous.

Still, the jump since last year does mean that we would need to monitor the numbers going forward, as corresponding increases in coming years would mean we reach China levels within the next four to five years. Also, before we pat ourselves on our backs too vigorously for our financial prudence, keep in mind that there is a huge unorganised lending sector in India. The 11 per cent number does not consider the amounts owed to shady pawn shops, gold loan outfits, and that weird uncle who seemed generous at the time, but now calls daily asking for his money back. Nonetheless, considering we have an unorganised GDP sector to complement the lending sector, it is unlikely the actual number is anywhere near the China or US ratios.

So fewer kids are getting a good education and the ones that are may not have the cleanest of uniforms because they don’t have a washing machine at home.

The other interesting thing to look at, is where the money is being spent. Bank data shows us that most of the debts being accumulated are either for housing or for personal loans. We can’t guess exactly what personal loans are used for, but banks suggest it’s usually weddings, travel, and (ironically) paying other debts. In fact, the only two areas where people have borrowed less money are education and consumer durables. So fewer kids are getting a good education and the ones that are may not have the cleanest of uniforms because they don’t have a washing machine at home.

It is a little worrying that education is such a small portion of the debt we accumulate. There is ample data to show that we are happy to accumulate debt for weddings, but would shy from spending in a similar way on education. There are also fundamental issues with defaults when pertaining to education loans, so the blame must be taken accordingly.

Interestingly, credit card debt has increased by nearly 30 per cent a year for the last four years. This is a fitting indicator that we’re getting less risk-averse. Banks have played their part in all this, by trying to shove credit cards down our throats every time we so much as check our account balance at an ATM. In addition to this, demonetisation forced a lot of people to get used to that magical feeling of buying things for free, until the credit card statement hits them over the head at the end of the month.

Credit cards can be scary things when not used properly. It’s great that they give reward points and, given a time machine, you can go back to the ’60s and open locked doors with them. However, the interest rates on late payments are criminally high and Indians are only still waking up to the horrors of compounding debt. There are plenty of cases annually of individuals who get sucked into a debt vortex and are unable to climb out. In America, this has become somewhat of an epidemic, so there is cause for concern that the less financially literate will be pulled down, if not careful.

Even if household debt does continue to increase, the fundamental truth about Indian spending is that we prefer assets. Whereas debt can just as easily be accumulated for buying fancy cars and taking expensive holidays, most Indians are happy spending on housing and on gold. Both these avenues are effective wealth preservation methods, meaning that at the very worst, we’re unlikely to dig a debt hole we cannot crawl out of. It has been estimated that the household level gold reserves in India are in the range of one trillion dollars and that Indian housewives have about 10 per cent of the world’s gold. Think about this the next time an aunty asks you for help and you’re second guessing whether it’s worth the effort.

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